January saw an element of caution return to markets following their strong run over the preceding four months. Domestically, backward-looking data remains relatively weak and cautious comments from the Governor of the Bank of England led to an increased expectation that interest rates might be cut. However, there is mounting evidence that the market’s optimism in December following the UK election result is translating into a tangible ‘Boris Bounce’ economically, most notably within the housing market. In the short term, however, domestic companies paused for breath following strong recent performance as the market looks for confirmation that current earnings expectations can be met. Valuations still remain low for many of these companies, which serves only to remind us quite how cheap they became during the Summer months last year. Similarly, cyclical shares consolidated their recent gains or retreated slightly as enthusiasm over the signing of the trade deal between the US and China was replaced by concern over the impact that the outbreak of Coronavirus might have on economic growth. Domestic Chinese demand is clearly being hit as cities are quarantined and consumers change their behaviour. The impact on global supply chains is at this stage less clear, however, companies exposed to Asia, commodity companies and more cyclical businesses have fallen whilst uncertainty remains. We had been increasing our exposure to these areas prior to the outbreak as we felt value existed as a consequence of uncertainty over trade tariffs. We cannot predict the impact of the current Coronavirus outbreak, however, experience of the SARs epidemic suggests current market weakness presents more of an opportunity to add to holdings in these areas rather than being a cause to panic. As concerns rose about the outlook for global growth, defensive sectors rallied, growth outperformed value and defensive assets, such as Gold performed well.
Against this backdrop, the The TB Wise Multi-Asset Income fund retraced some of its recent gains, down 1.97%. This compared to a fall of 3.48% for the CBOE UK All Companies index and to the average fund in the IA Flexible sector, which fell 0.49%. Over one year the fund has delivered a return of 11.77% compared to a rise of 10.47% for the CBOE UK All Companies Index and 11.17% for the average fund in the IA Flexible sector. Despite the strong performance over the year the Income B units of the fund continue to yield 5.2%.
We continue to maintain a high exposure to UK equity where valuations still reflect the uncertainty over the eventual trade deal that is supposed to be agreed by the end of this year. The election of Boris Johnson has provided some clarity for markets as the prospect of asset nationalisation by the Labour party receded and expectations increased that the levelling up agenda of the Conservatives will lead to increased public spending, particularly on infrastructure. This benefited a number of our Construction related holdings, such as Morgan Sindall (+13%) and Henry Boot (+3%), extending the gains they made in December. Shoe Zone (+13.5%) also performed strongly on the back of its full year results, which showed the business has stabilised following weaker trading over the Summer and provided encouragement over the prospects for their Digital and Big Box divisions whilst announcing a promising hybrid high street concept. However, domestic financials were weaker as expectations of an interest rate cut rose. With the exceptions of XP Power, which rose 15% on the month following an encouraging trading statement highlighting increased order intake, and Alliance Pharma (+3%) who delivered a positive trading update, our international holdings were generally weaker on the back of the Coronavirus outbreak rather than any specific newsflow. Standard Chartered (-11%), Rio Tinto (-9%), Page Group (-13%), Blackrock World Mining (-6%) and Aberdeen Asian Income (-5%) all fell on no stock specific news. Marstons (-17%) and Elementis (-28%) both issued mildly disappointing trading statements, however, the share price reaction appears overdone. More defensive holdings, such as Middlefield Canadian Income (8%) and Ecofin Global Utilities & Infrastructure (+7%) performed strongly.
During the month we added 3 new holdings to the fund: Paragon Banking Group, Volution & Watkin Jones. Paragon is a professional Buy-to-Let lender which is expanding into more Commercial lending. With an excellent long term lending track record, we believe the current dividend yield of 4.2% is well underpinned and the company has multiple opportunities to continue to grow its earnings over the medium term. Volution is a leading supplier of ventilation products for buildings and enjoys increasing regulatory tailwinds as planners seek to make buildings more thermally efficient. Watkin Jones is a leading developer of purpose built student accommodation and Build to Rent apartments in the UK. We took profits in certain holdings that have performed very strongly in recent months, namely XP Power, Henry Boot, Morgan Sindall & Polypipe. We have continued to build our holdings in Unilever, Provident Financial and Trifast. We have also incrementally added to our funds and direct equities exposed to Asian markets as the Coronavirus has caused prices to fall to attractive levels.